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        Millennium Dollar^®

          A Private Currency for Public Consumption

          Revised November 25, 2005

The Millennium Dollar^® (MR$) is a private currency designed to be self-adjusting for inflation and deflation. This is achieved by indexing the value of the MR$ to the U.S. dollar (USD) using an inflation index. This indexed value is then secured by assets on a present value basis, which will include securitized U.S. Treasuries and cash investments. As such, the purpose of the private currency is to maintain a real (or constant) purchasing power over time.

Money:          

Money can be defined in many different ways, but it is generally agreed that money has three primary functions. Money is used as:

            1. medium of exchange,

            2. a unit of account and

            3. as a store of value.

Our goal is for the Millennium Dollar^® to perform the functions of money, as a medium of exchange, a unit of account and as a store of value; but, why issue a new currency for this purpose? We believe that the ability of money, to maintain a real (or constant) level of purchasing power over time, is critical to its ability to perform its primary functions. This is how inflation, and deflation, destroy the use of a currency by slowly destroying its primary functions; until society is forced to revert back to barter. (We shall use currency and money interchangeably throughout this document.) For a discussion of the theory behind the offering of the private currency, please see: A Brief Discussion of the Private Currency.

John Law: 

One of the earliest, and perhaps most notable, issuers of a private currency was John Law (1671 - 1729). Law was a Scottish financier, who issued a private currency in France. At an earlier date, he aptly stated the importance of money with respect to trade, when he wrote:

                 Trade and money depend mutually on one another; when trade

                  decays money lessens; and, when money lessens, trade decays.

Initially, Law’s currency did very well, as he set aside reserves of 25% to back his currency. (Today, the United States banking system sets aside reserves of 8% to 12%, and sometimes less; depending upon each bank’s assets.) The French economy, formerly in a deep recession, experienced substantial prosperity for a few years by using Law’s private currency. Ultimately, financial competition and political intrigue forced Law to turn over control of his bank, and hence his currency, to the King’s representatives; who were less concerned about reserve ratios. (This also freed Law to became involved in more speculative promotions, which benefited from the government’s loose money policy.) Eventually, Law’s currency collapsed, thereby fulfilling his own observation by sending the French economy into a tailspin.

Moral:

In our opinion, the moral of our story about John Law is simple: the success of any currency ultimately depends upon the quality and suitability of the assets securing the issuance of the currency. Certainly, others may have a different opinion. Nonetheless, John Law’s observation and his experience serve as a valuable lesson about the importance of money with respect to trade. This is especially important for merchants, who are among the first to be impacted by a decline in money and trade; which are inextricably linked. In fact, money is the life blood of the marketplace by which wealth and property are circulated and distributed. As the health and well-being of the money supply increases, the accumulation and distribution of wealth also increases. Unfortunately, the inverse is also true. For these reasons, we have included herein an extensive description concerning how the Millennium Dollars^® will be secured by assets. 

Merchants: 

Merchants will be asked to accept Millennium Dollars^® at the indexed value; which may then be redeemed for U.S. dollars from the issuer, sponsor or other currency exchangers at the prevailing currency exchange rate. We expect the difference, between the indexed value and the currency exchange rate of the MR$, to be roughly equivalent to the merchant’s cost of converting credit card receivables into USD. Nonetheless, it is important to note that the merchant can avoid this cost by paying his or her creditors directly with the MR$ received in the course of business, since it is an exchangeable currency. This option is not available with credit card receivables, nor do we expect that it will become available at any time in the near future.

Start-Up Period: 

     Start-Up Period: 

Early-on; the difference, between the currency exchange rate and the indexed value of the private currency, may be greater. This is normal for the issuance of any new financial instrument; since it provides an incentive for the initial users, who can benefit by purchasing the instruments at a more favorable price. Ultimately, the inflationary adjustment on the private currency, when compared to the lack of any adjustment on the government-issued currency; should cause the currency exchange rate of the MR$ to approach the indexed value.

Speculation: 

There is historical evidence that the currency exchange rate of a private currency may eventually exceed the indexed value. While this is not our goal, the currency exchange rate must be allowed to float in the marketplace over time. Certainly, the rising currency exchange rate will provide an incentive for the issuance of greater amounts of the private currency. The resulting supply and demand should bring the currency exchange rate in line with the indexed value. Hence, any premium in the value of the private currency over the indexed value should be considered a temporary event, which market forces will respond to accordingly. We do not encourage such speculation. Nor do we have any obligation to inform speculators with respect to the proposed issuance of the private currency over time. The Millennium Dollar^® is not being issued for the benefit of speculators; but rather for those who have a sincere desire to protect the purchasing power of their capital over time. Protecting the purchasing power of one’s capital is not speculation; but rather, a form of self-preservation.

Investment Status: 

Millennium Dollars^® are not an investment, but they may be used to denominate investment instruments. If, at times, the inflationary adjustment on the MR$ is better than the nominal return on your bank, or money market, account; it is not because you are earning a real return on the MR$; but rather, that you are losing money in real terms on these other investment vehicles. This occurs when the nominal rate of return is less than the rate of inflation. As an example; if inflation is 3.0%, and you are earning 2.0%; then your real rate of return is -1.00%. In other words, you will not even receive a full return of the purchasing power of your money, since you need to earn at least he rate of inflation just to break-even. If you are not verifying the real rate of return on your fixed-income investments, then you really have no idea of whether you are getting ahead or falling behind.

The Millennium Dollars^® are not offered as an investment. The goal of the MR$ is to maintain the purchasing power of your capital over time, as measured by the inflation index; as such, it is not designed to generate a real return; hence, it is not an investment. As banks and money market funds begin to use private currencies, that are secured by inflation-adjusted assets; then they should be able to offer investments that will generate real returns for investors. The acceptance of private currencies, such as the inflation-indexed Millennium Dollar^®, should bring this prediction to fruition sooner.

Payment Instruments: 

The Millennium Dollar^® is not a payment instrument, although it is used for making payments like any other currency. There is a subtle difference between payment instruments and money. Payment instruments, such as checks, credit card receivables, money orders and traveler’s checks, transmit money from one party to another through an intermediary, such as a bank, credit card company or a money service business. These payment instruments are then redeemed for money (typically, USD). Conversely, currencies, such as USD and MR$, can be transferred as money directly from the buyer to the seller, or from the debtor to the creditor, without any need for redemption from a third party. Similarly, the conversion of one currency, say MR$ to USD, is a monetary conversion; it is not a monetary redemption. Monetary conversions from one currency into another currency (i.e. from USD into yen) are offered as an optional service, while monetary redemptions (i.e. from a personal check into USD) are fulfilling a contractual commitment of the payment instrument. In fact, there is no commitment to redeem the Millennium Dollar^® by the issuer, or the sponsor; but rather, they have jointly committed to preserve the purchasing power of the MR$ over time, as measured by the inflation index. See: Monetary Conversions below.

Promise-To-Conserve:

So what does our private currency represent? The Millennium Dollar^® represents a promise-to-conserve the purchasing power of the holder’s capital, as measured by the inflation index. The promise-to-conserve is deemed to have been met; so long as, the sponsor has set aside assets on a present value basis sufficient to back the indexed value of the Millennium Dollars^® issued and outstanding on a 1:1 ratio. (These assets then secure the issue of new securities by the sponsor, that are exchanged for the MR$ notes from the private currency issuer. We sometimes simplify this explanation; by saying that, the MR$ notes are secured by the assets of the sponsor.) This is the only commitment being made by either the issuer, or the sponsor, of the Millennium Dollars^®.

Promise-To-Pay:       

Originally, currency was issued as a promise-to-pay, which meant that the holder could exchange the currency for hard assets, such as gold or silver on demand. As an example, John Law’s currency, issued about 300 years ago, stated succinctly:

                 The bank promises to pay the bearer at sight, the sum of . . . livres,

                 in coin the weight and standard of this day, value received.

Following World War II, the Bretton Woods system of fixed exchange rates was established. Under Bretton Woods, the U.S. dollar was fixed at $35 to one ounce of gold; while other participating countries then pegged (or indexed) their currencies to the USD. However, President Richard M. Nixon took the United States off the gold standard in 1971, as a result of inflationary pressures caused by the Viet Nam War and the OPEC oil embargoes. By 1973, the Bretton Woods system collapsed and was replaced by our current system of floating exchange rates.

Today, there is not a single government-issued currency in the world that is indexed to any hard asset, let alone gold. (Some currencies are indexed to other nominal currencies, such as the USD or the yen; but they are indexed to nothing.) As such, the concept of currency as a promise-to-pay has become obsolete. Governments around the world make no promise when they issue their fiat currencies; and, even if they did make a promise, it would be moot unless the currency was properly backed by inflation-adjusted assets; since the promise of any government administration, however well-intentioned, could be easily overturned by the succeeding regime.

Currency Analysis: 

In modern times, no one has designed a currency as a promise-to-pay, which has not ultimately failed. The problem with a promise-to-pay is that it is a short-term (payment on demand) commitment, which forces the issuer to maintain assets that can be quickly liquidated to meet such demands. Meanwhile, these short-term assets are poorly suited to ensure the long-term purchasing power of the currency being issued. As such, the currency ultimately collapses, as the purchasing power of the reserves erodes over time. This, in our opinion, explains why there is not a single government-issued currency in the world today that represents a promise-to-pay; except of course, some currencies that offer a promise-to-pay some other fiat currency that promises nothing. Inasmuch as currencies travel through the space-time continuum with us; they should be designed as a promise-to-conserve their purchasing power, not as a promise-to-pay. However, we still need the government-issued fiat currency for the purpose of measuring inflation and deflation; hence, the role of issuing currency as a promise-to-conserve must be met by the private sector. Finally, the private sector is also better situated than the government to issue a currency, as a promise-to-conserve; since the government lacks the required assets and technology to do so. Only the marketplace has the required assets, and only private enterprise creates new technology. Beyond issuing the fiat currency, the role of the government should be to ensure, oversee and regulate a commercial environment, whereby companies in the private sector can competitively offer innovative private currencies. Ultimately, the private currencies, which work the best, will survive and prosper. In essence, we must treat money as just another product in the marketplace, which provides a service to its users.

Friedrich August von Hayek: 

According to some reports, the most influential economist by the end of the twentieth century was Friedrich von Hayek (1899 - 1992). Early on, the Austrian-born economist was a contemporary of John Maynard Keynes in England; but, later in his career, he was associated with the University of Chicago. Hayek became a leading economist by promoting market-driven economies as opposed to Keynesianism, which endorsed active government participation in the management of the economy. Ultimately, Keynesianism was largely blamed for the great inflation of the late 20^th century, whereby burgeoning government debts and deficits led to hyper-inflation. Following the great inflation, Hayek supported the issuance of private currencies, even proposing his own standard currency. (He proposed backing his currency with a basket of commodities.) Hayek once commented on the record of governments in issuing currencies, stating that:

                 All history contradicts the belief that governments have given us

                 a safer money than we would have had without their claiming the

                 exclusive right to issue it.

Hayek received the Nobel Prize in economics in 1974. Later, the University of Chicago published the twenty-two volume Collected Works of F.A. Hayek. Volumes 5 & 6 were titled: Good Money, Part I and Good Money, Part II. Hayek asserted that there was no reason why government-issued fiat currencies could not circulate side-by-side with currencies issued by the private sector; although, he acknowledged that it would still be possible for a government to mismanage its fiat currency, and thereby see it collapse.

Payment Instrument Analysis:         

In our opinion, only payment instruments should be designed as a promise-to-pay; and only then in a currency that represents a valid promise-to-conserve. In order to be a valid promise-to-conserve, the currency must be secured by inflation-adjusted assets on a present value basis. To the best of our knowledge and belief, only the Millennium Dollar^® can meet this standard; and even then, only by using certain patent-pending technology in association with inflation-indexed investments.

Government-Issued Currencies:     

By achieving these objectives, we will see our current nominal monetary system evolve into a real monetary system. We say “evolve,” rather than “replace;” since we still need the government-issued nominal currency in the marketplace to measure inflation and deflation over time. In point of fact, if a government-issued currency is used in the short-term, before inflation or deflation can act upon its purchasing power; then it is by definition a real currency. Hence, there is no problem with the continued issuance by the government of the paper currency on a fiat basis; the problem occurs, when we use such fiat currencies (or their monetary units) to define obligations over longer periods of time without verifying the purchasing power of the monetary unit. For then, we are susceptible to the destructive effects of inflation and deflation.

Short-Term? 

Given the foregoing definition of the government-issued currency, as being a real currency in the short-term; the question arises: What constitutes short-term? If we assume a three percent (3.0%) rate of inflation, then on average the inflation index would measure a change in the rate of inflation every 6.24 days. Hence, short-term is a week, or less, at a 3.0% inflation rate. Currently, if you are holding money for longer than a week, then you should convert to Millennium Dollars^®.

Sale: 

The sponsor is offering to sell the Millennium Dollar^® currency to buyers. This is a two party transaction between the seller and the buyer, which does not involve the transmission of money from one party to another through an intermediary. If the sponsor subsequently elects to become a money service business involved in the transfer of money between parties, such as transferring MR$ from Party “A” to Party “B”; then it will apply for money transmitter’s license(s) in the appropriate jurisdiction(s). As such, the sponsor will only deliver the MR$ notes to the business or residence address of the purchaser.

Insurance Program:

When the MR$ notes are to be shipped, the purchaser must pay for shipping, handling and insurance. The sponsor will require insurance on all shipments of the MR$ notes up to $10,000 in value; and will consider offering insurance for larger shipments on a case-by-case basis. Inasmuch as the major common carriers will not agree to offer insurance on the delivery of money, the sponsor will self-insure the shipments. The sponsor will charge the same insurance premium as the U.S. Post Office. The sponsor will also record the serial numbers of all MR$ notes being shipped. Such notes will not be secured by the present value assets, nor will they be eligible for conversion into USD; until such time as the delivery of the MR$ notes has been confirmed. The confirmation of delivery may come from either the common carrier, or the purchaser. The insurance coverage will include loss, theft and damage. The coverage for loss and theft terminates upon confirmation of delivery by either the common carrier or the purchaser. If there is no confirmation of delivery within 72 hours of the estimated date of arrival, then the purchaser may file a claim with the sponsor to have the MR$ notes replaced. If the MR$ notes are damaged, they must be returned to the sponsor; after which, they will be replaced by new MR$ notes. The purchaser must make the insurance claim within 15 days of the projected delivery date, and must return the damaged notes to the sponsor within an additional 15 days. Any and all valid claims will be deemed to have been properly satisfied by the sponsor in return for the issuance and delivery of new MR$ notes to the purchaser. Claims will not be satisfied in USD under any circumstances. (However, there is nothing to stop the purchaser from immediately requesting that the new MR$ notes be converted back into USD, at the prevailing currency exchange rate.) For more information, please see: Insurance Program.

Disclaimer: 

The promise-to-conserve the purchasing power of the Millennium Dollar^®, as described above, is the only commitment being made by the issuer to the MR$ holder. The promise-to-conserve is not a warranty, but a promise-to-conserve the purchasing power of the Millennium Dollar^® on a best efforts basis by setting aside assets on a present value basis. This distinction is necessary, since the issuer and sponsor cannot warrant that market conditions, government regulations and other factors beyond their control, will always permit them to maintain the assets securing the private currency on a present value basis. Unfortunately, this is the nature of the world in which we live; and, to represent otherwise would be wrong. Nonetheless, the Millennium Dollars^® will begin with 100% reserves on a present value basis. Hence, any shortfall in the MR$ reserves must then be compared to the reserves set-aside for other competing currencies.

Monetary Conversions: 

While it is in the best interests of the issuer, and the sponsor, to provide monetary conversions (from MR$ to USD); they are not required to do so; if, in their sole opinion, such monetary conversion activities would threaten their ability to maintain the assets on a present value basis. This is based upon the simple belief that the best way to support the currency exchange rate of the Millennium Dollar^® is to ensure that the present value assets are maintained. As participants in the marketplace verify the existence of the present value assets, then they should be willing to accept the Millennium Dollar^® at the indexed (or USD) value for the exchange of goods and services and the payment of other debts.

Present Value Test of the MR$ Notes:

Whenever we have a financial instrument that provides a cash payment stream, we can calculate the present value of that financial instrument. By using a present value calculation, we can compare the performance of one instrument, or payment stream, to another; provided only that we select a capitalization rate. If we think of the capitalization rate as the rate of return we want on our capital, then the resulting present value tells us what we can pay for that instrument to earn that rate of return. (This assumes that the instrument performs according to the original assumptions.)

As an example, if we want a currency that will hold its value over time, then we want a rate of return equal to the rate of inflation (or deflation). To achieve this, we would use the rate of inflation (or deflation) as the capitalization rate. So, let’s do a present value analysis of the assets, which will be securing the indexed value of the MR$ notes.

To begin with, we have to define the characteristics of the assets; which are as follows:

            Number of Periods:    (remaining payments)

            Capitalization Rate:   (inflation rate per period)

            Payment per Period:  (inflationary adjustment per period)

            Future Value:             (par value or final principal payment)

            Present Value:            (par value or final principal payment)

As you can see, we have described each of the characteristics of the assets without applying any actual values. This raises an interesting question: How can we be so sure that the Present Value will always equal the Future Value with respect to our assets? The answer is relatively simple. Please note, that the Payment per Period is equal to the inflationary adjustment per period times the par value (or Future Value), while the capitalization rate is equal to the rate of inflation. As such, the Payment Period will fluctuate directly with the Capitalization Rate, which means that the Present Value must always be constant and equal the Future Value.

What we have just discovered is the means to create a private currency that is continuously backed by assets on a present value basis. We simply need assets; whereby, the payments adjust with the rate of inflation (or deflation) and the indexed value of the private currency equals the Future Value of the assets. Let’s check this out with some present value calculations. (Please note that negative cash flows are payments we receive, while positive cash flows are payments we make.) First, let’s alter the rate of inflation (or deflation):    

            Assuming:

            Inflation (Deflation) Rate:      3.0%             10.0%             -5.0%

            Capitalization Rate:               3.0%              10.0%             -5.0%

           ¹Payment per Period:            -$.25            -$.8333          +$.4166

            Term in Months:                     240                  240                  240

            Future Value:                      -$100               -$100              -$100

            Then:

             Present Value:                      $100                $100               $100 

            ¹The payment is the inflationary adjustment, which is the inflation rate times the par

                value of $100; hence, the payment adjusts to the inflation, or deflation, rate over time.

Most calculators today will allow you to solve for the Present Value by loading the first four values (i.e. the Rate, Payment, Term and Future Value) into your calculator. If you try this procedure with each column of numbers above, then you will find that the Present Value is always constant and always equal to the Future Value, since the Payment is always adjusting with the change in the rate of inflation (or deflation). (Remember, that the Future Value, shown as a negative number, is a cash flow that you receive; hence, the Present Value is positive.)

It is also important to note in the third column from the left, that our Present Value calculation works equally well with deflation. When amortizing such instruments during deflationary time periods; the positive payment (i.e. a payment you make) will actually occur as a reduction in the Future Value of the instrument, since the value of USD will increase during deflationary periods. So, you won’t have to actually make a payment, but you will be debited for the increasing value of the USD you will receive in the future. This adjustment preserves the constant value of the instrument during deflationary time periods, which is our goal; since it is the asset backing our private currency.

Let’s try this again, but this time we will also alter the Term in Months:

            Assuming:

            Inflation (Deflation) Rate:      3.0%             10.0%             -5.0%

            Capitalization Rate:               3.0%              10.0%             -5.0%

            ¹Payment per Period:            -$.25           -$.8333         +$.4166

            Term in Months:                      120                 360                 180

            Future Value:                       -$100             -$100              -$100

            Then:

            Present Value:                       $100               $100               $100 

            ¹The payment is the inflationary adjustment, which is the inflation rate times the par

                  value of $100; hence, the payment adjusts to the inflation, or deflation, rate over time.

Despite six different assumptions, whereby we have varied both the rate of inflation (and deflation) as well as the term of the instruments; we have a constant Present Value of $100 for the assets securing the MR$ notes. As long as the Payment per Period adjusts with the rate of inflation; the assets can be of any Term, and we will still have a constant Present Value equal to the Future Value. Hence, if we set aside assets that are inflationary adjusted and have the same par value (or Future Value), as the indexed value of the MR$ notes issued and outstanding; then we will always satisfy the present value test required by our promise-to-conserve.

Present Value Test of the U.S. Dollar:

Now, let’s apply the same present value analysis to a government-issued currency, such as the USD. As an example, what would the Present Value of 100 USD be at a 3.0% annual inflation rate over the next 20 years? (Inasmuch as the USD has no inflationary adjustment, there would be no Payment per Period in your calculation.) As such, the Present Value of 100 USD under these assumptions is $54.92. Even more disconcerting is the fact that the Present Value of the USD will vary with the average rate of inflation, or deflation, over time; hence, you can not even plan on having $54.92, since the end result could be higher or lower. The inputs for verifying this with respect to $100 are as follows:

            Assuming:

            Inflation (Deflation) Rate:      3.0%               10.0%             -5.0%

            Capitalization Rate:                3.0%               10.0%             -5.0%

           ²Payment per Period:              $0.0                   $0.0               $0.0

            Term in Months:                      240                   240                 240

            Future Value:                       -$100                -$100             -$100

            Then:

                        Present Value:        $54.92               $13.65         $272.39  

            ²The payment stream on the USD is zero, since there is no inflationary or

                 deflationary adjustment over time.

Let’s try this again, but this time we will also alter the Term in Months:

Assuming:

            Inflation (Deflation) Rate:      3.0%               10.0%             -5.0%tl

            Capitalization Rate:               3.0%               10.0%             -5.0%

           ²Payment per Period:             $0.0                  $0.0                $0.0

            Term in Months:                     120                  360                 180

            Future Value:                      -$100               -$100              -$100

            Then:

                        Present Value:        $74.11                $5.04          $212.03

            ²The payment stream on the USD is zero, since there is no inflationary or

                  deflationary adjustment over time.

With six different assumptions, we have six different Present Values for the USD. Where fiat (government-issued) currencies are concerned, every time the inflation (or deflation) rate changes, and every time we assume a different Term; then the Present Value of the fiat currency will change. This being the case, how are we supposed to manage our monetary affairs over time, when we have no way of knowing what our USD-denominated assets will be worth? Obviously, the Millennium Dollar^®, secured by the present value assets, will resolve this problem. As participants in the marketplace begin to understand these facts; the currency exchange rate of the MR$ should approach the indexed value, if not exceed it.

Financial Tool: 

We present these calculations (above) to make one simple point: the Millennium Dollar^® is not just a currency, it is also a financial tool that will permit us to engage in long-term financial planning, since we can reasonably assess its future value at any point in time. This should be enormously useful for our investments, as well as for our financial obligations; for while other risks must also be considered, such as credit risk; we have largely removed the inflation risk.

Due Date: 

The Millennium Dollar^® has no redemption or “due date.” The MR$ is not a payment instrument, such as a check, credit card receivable, money order or traveler’s check. The Millennium Dollar^® has been issued as a currency with the expectation that it will circulate indefinitely. As this private currency becomes worn or soiled, the sponsor is required to replace it with new MR$; but may do so on a paper or electronic basis, at its sole discretion. (Due to the costs of printing, it is not possible for the sponsor to replace the MR$ with other paper notes indefinitely. Nonetheless, the MR$ notes are printed on high quality paper, which should last 100 years or more, if they were not in general circulation.)

Asset Redemption: 

While there is no redemption date for the Millennium Dollar^® as a currency; nonetheless, the assets securing the issuance of the private currency will periodically reach maturity. When these assets come due; the sponsor must (a) replace the redeemed assets on a present value basis, (b) purchase and retire an equivalent amount of MR$ from the marketplace; or (c) make a formal announcement acknowledging that current market conditions will not permit either (a) or (b). (Inflation-adjusted assets may not be available at a suitable price, and the MR$ may be trading in the marketplace above the indexed value.) If (c) occurs, then the sponsor will have 60 days to formulate a plan to rectify the situation; which will then be formally announced. While neither the issuer, nor the sponsor, is required to make up any shortfall; nonetheless, this is an option open to them, assuming it is permitted by law at that time. Inasmuch as intermediate-to-long term assets are being purchased to back the issuance of the Millennium Dollar^®, this should not be an issue for some time, if ever.

Issuer:

The issuer of the Millennium Dollars^® is Virtualmoney, Inc. (VMC), which has an exclusive license from Real Monetary Systems, Inc. (RMSI) to use patent-pending technology for this purpose. At the appropriate time, VMC intends to offer Millennium Dollars^® electronically over the Internet. (VMC actually offered MR$ over the Internet for about six months; which terminated on December 31^st, 2001, as a result of the Dot.com crash and the aftermath of the 9/11 terrorist attack.) If, and when, VMC initiates the issuance of the MR$ on-line, it will accept the paper MR$ currency at the indexed value for an equivalent amount of electronic currency. The only difference will be the shift from a paper format to an electronic format; since both forms of the Millennium Dollars^® will be secured by inflation-adjusted assets on a present value basis. As such, paper and electronic Millennium Dollars^® should be exchangeable on a 1:1 basis; except that, the holder of the paper MR$ must bear the cost of forwarding the paper currency to RMRI for the currency exchange.

Sponsor: 

Real Monetary Reserve, Inc. (RMRI), pursuant to an exclusive license from VMC for the 9^th Federal Reserve District, will oversee the printing, sale, funding and distribution of the Millennium Dollars^® as a paper currency. RMRI will not issue MR$ without funding the assets to secure the private currency on a present value basis, as described herein. (If the assets are not purchased in advance of the MR$ issuance, then the cash required to purchase the assets must be set-aside concurrently with the issuance. In the short term, the cash becomes the assets with the sponsor responsible for making up any shortfall in the inflationary adjustment.)

Affiliates: 

RMSI, VMC and RMRI are privately-held Minnesota companies that are affiliates under common ownership and control. In addition, they may be using the services of still other affiliates, which may be under common ownership and control. As it turns out, implementing the patent-pending technology does not require the development of a single company; but rather, the development of an industry. This is the challenge, as well as the opportunity, of developing a monetary system for a new currency. A problem does arise is when someone asks for a business plan; since our plan addresses the development of an industry and not a single business. And, even then; the development of an industry is ever-changing, which makes even an industry plan obsolete within a matter of months.

Present Value Assets: 

The assets securing the Millennium Dollars^® will include securitized U.S. Treasuries and permitted cash investments (of 12 months or less) on a present value basis. The rate of inflation will be used as the capitalization rate to calculate the present value of the assets. The sponsor is committed to maintaining the present value assets on a 1:1 basis with the MR$ issued and outstanding.

Technology:               

The Treasuries will be securitized with patent-pending technology, which permits the sponsor to secure the Millennium Dollars^® with present value assets equal to the indexed value of the private currency at all times. Initiating this technology requires the creation of a private liquid-payment market for the Treasuries, whereby they can be stripped into their components. Until such time as the liquid-payment-market is initiated, and operating properly; the sponsor will set aside additional Treasuries to ensure that the MR$ issued are properly secured on a present value basis. See: Liquid-Payment Market below.

Verifying the Monetary Unit: 

Inasmuch as the monetary unit is the foundation of our financial and economic affairs, it is important that we verify the performance of the monetary unit over time. As such, the present value assets, as well as the MR$ issued and outstanding, will be audited annually by an independent certified public accountant to ensure the issuer’s promise-to-conserve is being upheld. As George Washington used to tell Alexander Hamilton, his aide during the Revolutionary War: Trust, but verify!

Alexander Hamilton: 

Later, when George Washington was elected as our first President, he appointed Alexander Hamilton as the first Secretary of the U.S. Treasury. In his Report on the Mint, January 28, 1791, to congress; Hamilton wrote:

               There is scarcely any point in (economics) of greater moment than the

               uniform preservation of the intrinsic value of the (monetary) unit. On

               this, the security and value of property essentially depend.

Only by verifying the intrinsic value of the monetary unit can we hope to secure the value of property over time. To the best or our knowledge and belief, only the Millennium Dollar^® will permit us to verify the intrinsic value of the assets securing the private currency with any degree of precision.

How it Works:

The sponsor will purchase securitized Treasury Inflation Protection Securities (TIPS), which are inflation-indexed bonds issued by the U.S. Treasury. The TIPS have two primary payment streams, including the real-interest-only (RIO) payment stream, which is paid semi-annually; and the real-principal-only (RPO) payment stream that is paid at maturity. The real interest is paid on the RPO payment stream, which the U.S. Treasury refers to the RPO strip as the “accrued principal.” The RPO payment stream consists of the original nominal-principal-only (NPO) payment stream (or par value) of the TIPS; plus the inflationary adjustment or accrued-interest-only (AIO) payment stream.

For our purposes, the RPO strip, including the original nominal principal plus the inflationary adjustment thereon; makes the perfect asset to back the issuance of the private currency; provided only, that we readjust the payment streams. In order for the TIPS RPO strips (as the assets) to have a present value equal to the indexed value (i.e. the USD value) of the private currency; we need to strip off and sell the AIO payment stream monthly. This would leave us with the RIO strip to cover our expenses and generate a reasonable profit for our efforts. To achieve this, we must initiate a liquid-payment market by securitizing the TIPS.

The sponsor then issues securities, backed by the stripped TIPS RPO strips, that are exchanged with the issuer for the Millennium Dollar^® currency. As the TIPS RPO strips are stripped of the AIO strip each month, the payment stream is paid to the MR$ issuer, along with the final NPO payment made by the Treasury at the maturity of the TIPS. By combining the cash flows AIO and NPO payment streams, we will obtain the present value equal to the indexed value of the Millennium Dollars^® issued and outstanding; provided only, the initial value of the RPO strip equals the initial indexed value of the MR$ notes to be issued.

While we are explaining this activity herein, it should be understood that it occurs in the background; unbeknownst to the average Millennium Dollar^® holder. The MR$ note holder does not directly own the securities issued to the issuer of the private currency. As such, the MR$ note holder does not receive the monthly AIO payment streams, nor the NPO payment stream upon the maturity of the TIPS; since the payment of any of these cash flow streams would destroy the constant value of the private currency over time; since the purchasing power of the private currency must then be reduced by the amount of any such payment that is made.

When made, the AIO and NPO cash payment streams are made to the issuer of the Millennium Dollar^® currency, which must then make an adjustment to ensure that the present value of the assets will continue to equal the indexed value of the Millennium Dollars^® issued and outstanding.

As such, the issuer then has three options: The issuer can (1) repurchase Millennium Dollars^® from the marketplace, (2) purchase additional present value assets or announce that neither (1) nor (2) are possible. In the interim, the issuer may invest the cash payment streams into cash investments with a maturity of 12 months or less. See: Asset Redemption above.

Liquid-Payment Market:

The creation of the liquid-payment market allows the sponsor to provide the present value assets to secure the issuance of the MR$ notes, while still covering its expenses and generating a reasonable profit. The purpose of the liquid-payment market is to strip off and sell the inflationary adjustment (or AIO strip), which thereby generates a monthly cash payment stream. By creating the liquid-payment market; we have changed the characteristics of the assets, thereby enhancing their value. This increased value will then support the use of the assets (i.e. the securitized TIPS RPO strips) on a present value basis to match the indexed value of the MR$ notes issued and outstanding; and, it thereby leaves the RIO strip as a byproduct that can be sold to support a for-profit business.

Stripping Problem:

Nonetheless, creating a liquid-payment market for the TIPS RPO strips involves solving a problem we refer to as the stripping problem. In essence, when we strip off the inflationary adjustment (or AIO strip) each month, this AIO strip is then adjusted for inflation in the next payment period; where it must also be stripped. This doubles the number of striplings we must perform in each successive payment period. Hence, if we begin by stripping a single TIPS RPO strip; then we will have in the succeeding monthly payment periods: 1, 2, 4, 8 . . . 4.4 x 10⁷¹ strippings, assuming the TIPS mature in 20 years. Conversely, if we are using 30-year inflation-adjusted mortgages to back the MR$ notes; then we will have 5.87 x 10¹⁰⁷ strippings in the final stripping period alone for each mortgage-backed security with which we begin.

To give one an idea of just how truly large this number is; scientists estimate that the total number of electrons, neutrons and protons in the known universe is on the order of 1 x 10⁷⁹. Obviously, this creates an impossible administrative problem. Not only do we not have the time to complete the strippings; but, even if we could store the information from each stripping on a single electron, neutron or proton, we would still not have enough storage capacity to record the all the data.

Inasmuch as the number of strippings will double with each successive inflationary payment period, we can express our stripping problem as follows:

            Where:           1^st period = 1 stripping

                                    N = remaining stripping periods

            Then:             Total Strippings = TS = 2^N

                                    or: 2^N+1 = AIO Strips

In our case, the 2^N is the number of strippings for just the final stripping period, and assumes that we begin with only one instrument to strip in the first stripping period. (We also assume below that the final payment need not be stripped, since it will be made in cash.)

So, for 20-year TIPS RPO strips:

                                    1^st period = 1 stripping

                                    N = 238 remaining periods

                                    TS = 2²³⁸ = 4.4 x 10⁷¹ strippings

                                       or: 2²³⁹ = 8.8 x 10⁷¹ AIO strips

And, for a 30-year real mortgage-backed security:

                                    1^st period = 1 stripping

                                     N = 358 remaining periods

                                    TS = 2³⁵⁸ = 5.87 x 10¹⁰⁷ strippings

                                       or:      2³⁵⁹ = 1.17 x 10¹⁰⁸ AIO strips

We learned later that mathematicians and scientists refer to this kind of problem as a P = NP? problem. As it turns out, P = NP? problems are supposed to be virtually unsolvable.

P = NP?

In the twentieth century, the development of computers allowed mathematicians and scientists to undertake problems that would have been impossible without computers. Nonetheless, these same computers led us to a new class of problems referred to as P = NP? problems, which even the most powerful computers have difficulty solving. Herewith is a layman’s description of the P = NP? problem.

In the P = NP? equation, the “P” stands for polynomial time. Polynomial time is the period of time available to solve a problem. If the problem is to be solved by a human, then polynomial time may be the lifetime of a human being. If the problem is to be solved by the universe, then polynomial time may be the lifetime of a universe, and so on. “NP” stands for non-polynomial time, which means a period of time far longer than polynomial time. If you have a problem that requires an NP period of time to do the required tasks, then it is highly unlikely that you will ever solve your problem; since you won’t have the time to carry out the tasks.

P = NP? problems typically arise when there is a relatively simple task, such as stripping the AIO strip; but the number of such tasks is so large that it requires a non-polynomial time to complete. Basically, the challenge of any P = NP? problem is whether you can solve (i.e. complete the required tasks of) a non-polynomial (NP) time problem in polynomial (P) time; hence, making P = NP. P = NP? problems are deemed to be virtually unsolvable; so much so, that mathematicians and scientists typically give up, once they realize they have a P = NP? problem. For more information on P = NP? problems, please see: www.claymath.org.

Resolving the P = NP? Problem:

Fortunately, when we originally faced the stripping problem; we did not know that it was a P = NP? problem; nor, that it was supposed to be unsolvable. As such, we have resolved our own P = NP? problem, by creating a liquid payment market that would allow us to perform the required strippings and to track the resulting information as well. (We resolved our stripping problem in 1997-8, but did not learn of P = NP? problems until 2001; when the Clay Institute offered to pay $1 million to anyone who could solve any P = NP? problem.)

The solution, to our P = NP stripping problem, is the subject of a patent application that is filed with the U.S. Patent & Trademark Office. The patent application primarily involves sophisticated financial software, which will allow us to strip off the AIO strips; thereby creating the present value assets to secure the issuance of the private currency. The patent application is owned by Real Monetary Systems, Inc., which has licensed Virtualmoney, Inc. (the issuer) to use this technology for the purpose of offering the private currency. In turn, Virtualmoney, Inc. has licensed Real Monetary Reserve, Inc. to sponsor the offering of the Millennium Dollars^® in a paper format.

Shortfalls &/or Defaults: 

If there is any shortfall in the inflationary adjustment on the assets, due to an inadequate return on the cash investments; then the sponsor is obligated to cover the shortfall. However, neither the issuer, nor the sponsor, is required to cover any shortfall resulting from a default by the issuer of the inflation-adjusted assets; provided only, that such assets are U.S. government-issued securities, agency securities, other institutional-quality (“BBB” or better) credit rated investments and/or government-insured, or guaranteed, investments or certificates of deposit issued by FDIC-insured banks and thrifts. It is important to understand that neither the issuer, nor the sponsor, is underwriting, insuring or guaranteeing the aforementioned inflation-adjusted assets; since to do so, would make the issuing of the private currency impossible. As such, the securities issued by the sponsor to the issuer of the private currency are issued on a non-recourse basis; and, the issuance of the private currency as a promise-to-conserve is issued on a best efforts basis. Conversely, it is important to note that the issuer, and the sponsor, are attempting on a best efforts basis to provide a private currency, which is 100% secured by the present value assets. We are not aware of any currency in the world today, which can pass a present value test on this level.

Present Value:          

Inasmuch as the RPO strip includes the nominal-principal-only (NPO) strip and the future AIO adjustment, the they make the perfect asset to secure a private currency that is self-adjusting for inflation. Henceforth, the present value of the securitized TIPS RPO payment streams, using the rate of inflation as the capitalization rate, will perfectly match the indexed value of the MR$ currency; since they both use the same inflation index. Assuming the private currency is secured by the proper inflation-adjusted assets; and, that the issuers perform accordingly; then the promise-to-conserve cannot be upset by market volatility, competition, nor by any degree of inflation or deflation. For this reason, the sole focus, and the only obligation, of the issuer and the sponsor; is to ensure that the present value assets are maintained on a 1:1 basis with the volume of MR$ issued and outstanding. If this goal is achieved and maintained, then every other issue is considered moot; since the Millennium Dollars^® need not be converted back into the government-issued currency, since they can be spent directly as money in the marketplace.

Inflation/Deflation: 

During inflationary time periods, the indexed value of the MR$ (in USD) will increase, since the purchasing power of the USD is declining. (It takes an ever-greater number of USD to equal the purchasing power of the original MR$, during inflationary time periods.) Conversely, during deflationary periods the opposite effect occurs; the indexed value of the MR$ will fall in USD, since the purchasing power of the USD is increasing with deflation. While a change from inflation to deflation may cause participants in the marketplace to reconsider other factors; it should not affect their use of the MR$ as a currency. The stated goal of the Millennium Dollar^® is to provide a currency (or monetary unit) with a constant level of purchasing power over time. The MR$ will achieve this goal during both inflationary and deflationary time periods, as envisioned herein. As such, the MR$ is equitable to both borrowers and lenders, thereby allowing the marketplace to function in the most efficient manner.

Variation: 

At maturity, the U.S. Treasury has agreed to pay not less than the original par value of the TIPS. However, the securities issued by the sponsor, and the MR$ currency itself, are structured so that they will adjust in unison with inflationary or deflationary pressures without regard to the original nominal par value of the underlying assets. This is necessary, otherwise lenders would be protected from inflation, but borrowers would be penalized by deflation; since their debt obligation would not be adjusted downwards during deflation, when the value of the USD is increasing. This would destroy the original purpose of offering the Millennium Dollars^®. As such, if there is a windfall, when the Treasury pays the NPO strip; it will accrue to the sponsor of the private currency; but for this to occur, the term of the TIPS must be deflationary on average; which would reduce the accrued principle to less than the par value of the TIPS. (The windfall would then be the difference between the accrued principle and the TIPS par value.) Inasmuch as the central banks have a bias towards inflation, while regulating the money supply; this is unlikely to occur in our opinion.

Fiat Bonds:                

Unfortunately, the government’s inflation-indexed securities are fiat instruments, similar to the USD; which can be issued at-will. This means that some future administration can over-issue them. As it turns out, there is an historical precedent for this, when the U.S. government defaulted on the gold bonds it had issued prior to 1934. The gold bonds could be redeemed in USD, or a set amount of gold, as an inflationary hedge; until President Franklin Roosevelt passed a law making the holding of gold bullion illegal. This made the gold clause on the bonds unenforceable, which amounted to a default on the terms of the gold bonds. Ultimately, the Supreme Court ruled that the U.S. government had to make good on the gold bonds it had issued; but the gold clause on the bonds issued by the private sector were deemed unenforceable by the same court. After making the gold clause unenforceable, President Roosevelt devalued the U.S. dollar by 40%. Financial historians have estimated that $100 billion in gold bonds were outstanding at the time, while Fort Knox only held about $4 billion in gold. Clearly, the gold bonds were never truly backed by gold, but only offered a promise of gold; which made them fiat instruments. Hence, a default on the government’s inflation-indexed bonds is possible; since the TIPS, like the gold bonds, require no direct asset-backing. This does not appear to be a problem at this time, since the TIPS issued and outstanding represent a small percentage of the total U.S. government bond market. Nonetheless, the private currency will be better fortified, if it is secured by real assets in addition to some TIPS.

Other Assets: 

As such, the issuer and sponsor intend to shift the asset-backing of the Millennium Dollars^® to include other inflation-adjusted assets over time; including inflation-adjusted mortgages on improved real estate. Such mortgages will be pooled, securitized and institutional-quality credit ratings, or equivalent financial guarantees, will be obtained. The sponsor and issuer may also exchange the recycled MR$ for inflation-adjusted certificates of deposits from banks, thrifts and credit unions, which would then encourage these institutions to offer financial services in real terms. Ultimately, we expect the financial services industry to originate the inflation-adjusted mortgages as well. Nonetheless, there may be regulatory hurdles that have to be overcome before these events may come to fruition. In our opinion, the use of the Millennium Dollars^®, and other inflation-adjusted instruments by the banking industry, would go a long way to ensure that another thrift debacle will not occur in the banking industry; since it was largely the great inflation that destroyed the thrift industry at the end of the 20^th century. Certainly, others may disagree with this analysis.

Assets Vs. Liabilities: 

The securities, exchanged for the MR$ notes, will represent a liability for RMRI as the issuer; and an asset for VMC as the purchaser. Conversely, the MR$ currency will represent a liability for VMC as the issuer and an asset for RMRI as the purchaser. As RMRI distributes and sells the private currency, the USD received will be used to purchase sufficient present value assets to back the issuance of the private currency on a 1 : 1 basis. The present value assets will be primarily TIPS, which will be securitized using patent-pending technology to strip the payment streams. At the same time, VMC will be required by its agreement with RMRI to segregate the securities, which are directly backed by the present value assets. It will be understood that the sole use of the securities, exchanged for the MR$ notes, will be to support the value of the private currency. At this time, it appears that his may occur in only two ways; by maintaining the present value assets at the 1:1 ratio as set forth herein, and by hypothecating these assets for converting the MR$ notes back into USD.

Distribution of the Payment Streams: 

The intent of the private currency is to maintain a constant level of purchasing power over time, as measured by the inflation index. As such, the AIO cash payment stream, and ultimately the NPO cash payment upon the maturity of the assets; are not distributed to the private currency holders. Instead, VMC, as the issuer holding the securities and the recipient of these cash payment streams, will utilize the cash to ensure that the 1:1 ratio between the present value assets and the indexed value of the MR$ is maintained. This is achieved by using the cash payment stream to purchase MR$ currency from the marketplace, or to purchase additional present value assets; thereby maintaining the desired ratio on a 1:1 basis.

Securities Vs. Private Currency:     

It is important to note that the instruments issued by the RMRI, as the sponsor, are private placement securities, which are issued pursuant to exemptions to state and federal securities laws. These instruments include the traditional characteristics of fixed-income securities; including payment streams and a maturity date, when the outstanding balance is due and payable. However, the instruments issued by VMC, as the issuer, are currency notes; which offer no payment streams and have no maturity date. The currency notes represent a promise-to-conserve the purchasing power of the holder’s capital on a best efforts basis, they do not pay a rate of return over and above this amount. Hence, the MR$ notes do not represent an investment, since no reasonable investor would invest to simply see his, or her, original principal returned. If the MR$ notes appear to perform better than the available nominal cash investments, it is because many of these investments are actually generating a negative rate of return in real terms. This does not make the MR$ notes an investment, even though they may provide a safe harbor; until such time as the investment community begins to offer investments denominated in a real monetary unit, such as the Millennium Dollar^®. Finally, VMC has legal opinions that the Millennium Dollar^® is a private currency and is not a security. Private currencies are legal in the United States, provided that they are not misrepresented as the government-issued currency.

Hypothecation: 

The sponsor, and/or the issuer, will be permitted to hypothecate (or borrow against) the underlying securities to make a market for the private currency; except that, the currency exchange rate of the Millennium Dollar^® will float in the marketplace over time. The purchase of MR$ from the marketplace will reduce the volume of MR$ outstanding; thereby offsetting the borrowed funds and maintaining the ratio of the present value assets to the MR$ outstanding on a 1:1 basis. As the repurchased MR$ are recycled back into the marketplace, the borrowed funds must be repaid, or additional present value assets must be purchased, to maintain the correct 1:1 ratio. In the process, the cost of the hypothecation, as well as the income received by recycling the MR$, are the responsibility, profit and/or loss of the sponsor, and/or the issuer, as the case may be.

Taxable Impact: 

The Internal Revenue Service (IRS) has ruled that the inflationary adjustment on the TIPS is taxable on a current basis by taxpaying entities. Clearly, this appears to be inappropriate, since the inflationary adjustment amounts to a return of one’s original purchasing power and not a return on one’s capital. As such, the sponsor may elect to ask the IRS for a favorable ruling on the tax status of the inflationary adjustment on the Millennium Dollar^®. However, there can be no assurance that such a ruling will be requested; or if requested, that the IRS ruling will be favorable. Until such time as the IRS does rule favorably, the holders of MR$ should expect to find that the inflationary adjustment on the private currency taxable, assuming they are taxpaying entities. Once issued, the paper currency is designed to circulate without the permission of the issuer or sponsor. As such, there is no way that we can tabulate the tax liability for any MR$ holder. Hence, the responsibility of tabulating and reporting the inflationary adjustment for tax purposes falls solely on the shoulders of the MR$ holders.

Reporting Practices: 

It is expected that, the sponsor and issuer will be subject to laws requiring them to report monetary transfers in of $10,000, or more, as well as other suspicious transfer patterns. Intermediaries distributing the private currency may also be subject to these laws. It is the intent of the sponsor, and issuer, to abide by these laws accordingly; as well as to require our distributors to abide by these laws. As such, the Millennium Dollars^® should not be used for money laundering or other illegal activities, since the issuer, and the sponsor, intend to cooperate fully with the appropriate authorities concerning such matters.

Activities:       

While it is in the best interest of VMC and RMRI to support the currency exchange rate for the Millennium Dollar^®; nonetheless, they are not required to do so, if such actions would result in a violation of the promise to maintain the present value of the assets on a 1:1 ratio with the indexed value of the MR$ issued and outstanding. It is assumed that maintaining the present value of the assets, as described, is the best way to support the currency exchange rate over time; since doing so will generate confidence in the private currency.

Inflation Index: 

The Millennium Dollar^® will use the Consumer Price Index for All Urban Consumers (CPI-U) as the